The Obama Administration's Super-Expensive, Legally Dubious Medicaid Plan

Margot Sanger-Katz
National Journal

The Obama administration has hit upon a creative strategy to encourage Republican politicians to expand state Medicaid under the health care law. The only trouble: The plan is costly and its legal justification tenuous.

The plan was unveiled last week when Arkansas Gov. Mike Beebe, a Democrat, said his state might use Medicaid dollars to enroll new patients in the same private health plans that will be available for residents with higher incomes. If the state Legislature approves the plan, all Arkansans earning below 133 percent of the federal poverty limit—or about $15,000 for a single person—will be able to get health insurance. Other states are watching closely.

The idea has won over some “Obamacare” critics who like the fact that it would use the private insurance market instead of a government program to offer benefits to the poor. But it may enrage a different group opposed to the health reform law—those who are concerned about its impact on the federal budget.

Estimates suggest that a plan such as the one proposed in Arkansas may cost in excess of 50 percent more than the Medicaid expansion described by the Affordable Care Act. The cost would increase because private plans that will be sold on state insurance exchanges, or marketplaces, will be much more expensive than government-run insurance and won’t cover all of Medicaid’s required benefits.

“The fact that the administration is so unmindful of the cost and the easily foreseen consequences down the road shows how they are almost desperate to get this adopted and how uncaring they are for the consequences for the federal taxpayer,” said Rep. Bill Cassidy, R-La., a physician who has written a Medicaid-reform bill to limit per-capita payments to states.

Health and Human Services Secretary Kathleen Sebelius had to reach back some 25 years into Medicaid law to find the obscure clause that may permit such a move. Under that provision—buried in a long sentence of the Social Security Act—states can use federal Medicaid dollars to buy private health insurance. Recent regulations, but not the law itself, say such arrangements must be cost-effective.

That wasn’t the strategy the Affordable Care Act’s drafters envisioned. At one time, Senate Finance Committee members working on the bill considered allowing low-income Americans to obtain coverage through the individual marketplaces instead of a traditional Medicaid program expansion. Legislators rejected the idea precisely because it was so much more expensive than the alternative.

Sara Rosenbaum, a health policy professor at George Washington University and Medicaid expert, says she remembers being told at the time that the cost estimates ran into the tens of billions. “Here we are now with the secretary having resurrected a 25-year-old provision of the law to allow states to do what Congress considered and then informally rejected because of cost,” she said.

Arkansas’s governor has always supported Medicaid expansion. But a provision in the state’s constitution requires a three-fourths legislative supermajority to approve any expansion plan. Conventional expansion was a nonstarter in the GOP-controlled state House. So Beebe said he went to Sebelius with a list of concerns from legislators and came back with this deal. No one is guaranteeing that the new plan will pass, but leaders in both parties say it has a good chance.

“If we go through with this framework, at the end of the day we have Arkansans with private insurance policies, and we think that’s light years better than the alternative,” said GOP Rep. Davy Carter, speaker of the Arkansas House.

For the first three years, the newfangled expansion would likely be a boon for Arkansas’s economy. It would expand health coverage to a much larger population, potentially bringing patients and dollars into local hospitals. It would allow the state to cut parts of its budget that currently fund uncompensated care and the Children’s Health Insurance Program, said Republican Rep. John Burris, who chairs the state House Public Health, Welfare, and Labor Committee. It might also boost tax revenues, because the state collects a tax on all private-insurance premiums.

Under the Affordable Care Act, the federal government would pick up 100 percent of the bill until 2017. “If the federal government is paying 100 percent, why not?” asked Timothy Jost, a law professor at Washington and Lee University. “Why not purchase a Cadillac rather than a Chevy?”

Arkansas is unlikely to be the only state interested in this option, said Matt Salo, the executive director of the National Association of Medicaid Directors. “Any state that has until now been saying no can use this as a way to get to yes,” he said. Ohio Republican Gov. John Kasich has expressed some interest in a similar arrangement. And local reports suggest that legislators in Texas are also eyeing the deal. The ultimate cost for the federal government will depend on how many states sign on.

The Health and Human Services Department released a statement saying the Arkansas plan showed HHS is being “as flexible as possible within the confines of the law” and declined to answer any questions about the deal’s legal justification.